QROPS and pensions: advice for expats

                       QROPS and pensions: advice for expats

British expats abroad can now get more control over their pension’s plans, thanks to new rules that remove many restrictions for people who retire overseas.

 

They can pay lower tax on income drawn from a relatively new form of pension, avoid being forced to invest capital in an annuity which dies with the purchaser and pass their wealth to friends and family free of tax on death.

 

Needless to say, these important new opportunities are subject to extensive legislation, which will be discussed in detail later. However, the important point for now is that a Qualifying Recognised Pension Scheme (QROPS) can enable savers to enjoy the best of both worlds.

 

You can receive valuable tax reliefs while working and saving toward retirement in the United Kingdom, without needing to pay higher taxes when you draw benefits or submit to UK restrictions on how you invest and spend the fund

                                                  

What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?

As its name suggests, this is a form of pension based outside the UK which is recognized by the British authorities as being eligible to receive transfers from registered UK pensions. Reputable advisers will only recommend transfers to countries which provide consumer protection equivalent or greater than the safeguards in the UK.

People who are living inside or outside the UK can transfer their deferred company and personal pensions to a QROPS. Any pension can be transferred as long as an annuity has not been purchased or, if it’s a final salary scheme that the pension has not commenced.

Better still, where the pensioner has not been resident in the UK for five complete and consecutive fiscal years – and the tax rules determining residence will be examined in detail later in this guide – HMRC restrictions on how income and capital are spent no longer apply.

For example, as set out in Clause 2 Schedule 34 of the Finance Act 2004, there is no need to report what HMRC would regard as “unauthorised payments” and tax of up to 82 per cent that might be levied on such payments in the UK can be avoided. However, it is important to understand this does not mean trust busting is acceptable.

Who might benefit from considering a QROPS?

Anyone considering retiring overseas and becoming resident in a foreign jurisdiction or country for five years or more. The amount of tax you pay on income and capital received from your QROPS will be determined by the taxation of the country in which it is based and you are resident.

These laws or fiscal statutes vary from country to country but many are more favourable to pensioners than those in the UK.

For example, pensioners resident in Cyprus can opt to pay a fixed flat rate of five per cent tax on all income above a small tax-free band or personal allowance; alternatively, they can choose to receive a higher personal allowance and pay higher rates of income tax on any income in excess of the allowance.

The best option for you will depend on your personal circumstances and it makes sense to take professional advice which can take account of your individual needs and objectives.

British pensions that can be transferred to a QROPS include former employers’ occupational schemes (but not final salary or defined benefit schemes already in payment); Superannuation Schemes; Executive Pension Schemes; Self Invested Personal Pension Schemes (SIPPSs); Small Self Administered Schemes (SSASs); Section 226 Personal Pension Schemes; Section 32 Pension Transfers and Personal Pensions. You cannot transfer British Government or State pensions to a QROPS.

Do I need to leave the UK forever to benefit from QROPS?

No. Rising numbers of people who decide to retire overseas – perhaps to enjoy better weather and a lower cost of living – can take advantage of a QROPS. You can continue to visit friends and family or return to Britain for any reason, provided you remain a non tax resident of the UK. So, you could return to the UK whenever you wish but the maximum length of time you can spend in Britain will be limited before UK taxes apply.

For example, you must beware of the six-month rule and the three-month average rule to avoid becoming resident in the UK again for tax purposes and losing the advantages of QROPS.

If you are present in the UK for 183 days or more in any tax year – which starts on April 6 and ends on April 5 – or you are present in the UK for an average of 91 days or more per annum, measured over up to four years, then you may become resident in the UK for tax purposes.

But be careful because, these days, rules are not the law. It is possible to remain a UK tax resident even if you spend less than 90 days in the UK, so it makes sense to take advice that is specific to your individual circumstances in this very tricky area.

Since April 6 2008, if an individual is present in the UK at midnight, that counts as one day’s residence. In practice, days of arrival in the UK are counted but days of departure are discounted. Where an individual arrives and departs on the same day, this will not count as a day’s residence for tax purposes

Are QROPS suitable for everyone?

No. Most British pensioners retire as UK residents and so must pay UK tax. There is no statutory limit on the minimum value of pensions that can be transferred to a QROPS but only funds worth more than £100,000 are likely to generate sufficient tax savings to justify set-up costs, which vary between one per cent and five per cent of the fund transferred.

Pensioners who have plans or policies with Guaranteed Annuity Rates (GARs) higher than returns available today, may also find QROPS do not justify giving up their GARs. As mentioned earlier, Government pensions – excluding the National Health Service scheme - British State pensions and final salary or defined benefit pensions already in payment cannot be transferred to QROPS.

Why it makes sense to take specialist advice

Given the complexity and variety of different countries’ tax laws, this guide can only serve as a general introduction to the new opportunities created by QROPS. Specialist financial advisers, who are authorised in the UK and the country to which you intend to retire, can answer questions specific to your individual circumstances.

Remember that the fundamental purpose of a pension is to provide retirement income. So, it is vital to ensure that your money does not run out before you do – and to avoid taking unnecessary risks with your income or capital. For these reasons, it makes sense to consult fully-authorised, specialist advisers before making any decisions about QROPS.

But the first step for most people will be to build up the maximum pension they can within the UK’s tax rules, and this is the subject of the next chapter.

Remember that the fundamental purpose of a pension is to provide retirement income. So it is vital to ensure that your money does not run out before you do

Christopher.x.chapman@gmail.com

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What Is Financial Independence?

                                                Financial Independence

"Financial independence" is a term used to describe a person who does not need to actively participate in remunerative work to cover expenses. Generally, such a person is the recipient of Passive income, which may come through sources such as dividends, retirement accounts, or royalties. Financial independence is often the goal of retirement for many people, but some financial experts suggest this goal is slipping out of the achievable realm for many people.

A person who is financially dependent must actively seek sources of income in order to pay off regular debts and expenses. A young college graduate with no investment portfolio or savings will probably need to work to pay off expenses such as rent and utilities, as well as credit card debt, student loans, and automobile or house payments. The amount of money that a person needs to actively generate in order to meet expenses is the amount to which he or she is financially dependent. Through a lifetime of work, careful investing, or careers that create passive income, many people try to reduce their financial dependence until they are free from the requirements of actively earning a monthly or annual sum.

Most financial independence comes about as the result of passive income. Income is said to be passive when it is generated from sources that do not require active, ongoing work. There are many different types of passive income that people use to work toward financial independence. Rent earned from leased property, interest made from stocks and bonds, and dividends paid out to business owners may all be sources of passive income.

Royalties and residuals are another source of passive income that can be used to create financial independence. People are paid royalties when they have generated copyrighted material to which they own the rights. In order to legally use the material, people must pay the copyright  holder a royalty. Actors, writers, and entertainers sometimes receive residuals for repeated showings of their work; a re-run of a TV program, for instance, often results in a residual payment made to the show's creator. Successful creative artists can sometimes achieve financial independence by relying on royalties and residuals from their past creations.

Sometimes, financial independence can be achieved through cutting expenses. Retired people may have some sources of passive income, such as retirement accounts or Social Security benefits, but these may not be enough to cover cost of living expenses. Some people manage financial independence by altering their lifestyle to suit their passive income and assets through spending cuts. The loss of expenditures can often be compensated for by the reduced stress of a full retirement.

Dollar cost averaging

                                                 Dollar cost averaging

Dollar cost averaging (“DCA”) is a strategy often recommended by financial advisors, widely endorsed by the financial press, and taken nearly as gospel by many savers and investors. Perhaps this isn’t entirely surprising—the strategy, whereby investors gradually put money to work in the equity market over time (typically a set dollar amount each month or quarter), has strong logical and emotional appeal. Using this approach, the theory goes, an investor buys fewer shares when prices are high and more when they are low—in effect, a variation on value investing. DCA is also emotionally comforting to investors who, scarred by two major stock market crashes over the past decade, may be leery of placing a large sum into the market all at once.

In theory, DCA has a lot going for it. But what about when it’s put into practice? At Gerstein Fisher, we decided to take a closer look at the historical performance of DCA versus lump-sum (LS) strategies to see how the results stack up.

                                                 Crunching the Numbers

• Lump Sum (LS) Investing (entire amount is invested at once)
• “Basic” Dollar Cost Averaging (a set amount is invested every month, regardless of market performance)
• Value Dollar Cost Averaging (more money is invested following a month with negative market returns; less following a month with positive returns)
• Momentum Dollar Cost Averaging (more money is invested following a month of positive market returns; less following a month with negative returns)

For simplicity, we assumed zero transaction costs in the various DCA strategies. Perhaps contrary to what most investors would expect, our research revealed that the best performance consistently comes from Lump Sum Investing, with average annualized outperformance over DCA of nearly two percentage points over a period of 20 years. The second-best performance came from the Momentum Dollar Cost Averaging strategy, whereby the monthly amount invested is ratcheted up on the heels of good market performance. Over the period we examined, this strategy achieved superior returns when compared to the basic DCA approach more than 50% of the time.

The superiority of the LS approach might not seem as surprising when you consider that in general, the long-term trend of equity markets has been upward: the S&P 500 yielded positive results in over 60% of the months between January 1926 and December 2010 and over 70% of the calendar years during that period.

Since LS investing, by virtue of placing the entire investment into the market on Day 1, has more money invested over a longer period of time, it would make intuitive sense that this strategy would earn higher returns given what we just said about long-term market trends. Similarly, of the DCA variations, Momentum DCA would have more invested than either the Basic or Value variations of the strategy, and thus would be the logical next-best performer in the group.

                                                               Conclusion

While LS investing is the clear winner when you look at the numbers, the reality is that investors are human beings with emotions for which hard facts and data sometimes are simply no match. That’s where Momentum DCA can prove useful: while still an inferior alternative to LS investing, it offers the potential for higher returns than a basic DCA approach while providing the comfort of a measured, incremental approach to investors who might not quite be emotionally prepared to jump in with both feet.

The Power of Compound Interest

                 The Power of Compound Interest

Compound interest is a concept where the money you save garners interest so that future interest is earned on your original investment and the interest you have been accruing. The interest rate on your bank account is really what the bank has agreed to pay you for the privilege of holding your money. The bank pays you some interest every month, which accumulates on top of your initial deposit and any ongoing contributions. Any interest earned is also put to work and, therefore, the bank pays you interest on interest.

In this way, earning money with your money is easy, and over time your interest income will grow and grow. The first step to using compound interest successfully is committing to saving a fixed amount from each paycheck. Even if it’s only $50 or $100, regular deposits into a savings account will add up.  Financial websites like Bankrate.com can help you find the banks and interest rates that are best for you. The three key features of a good savings account are: no fees, high interest, and easy access to your money. Luckily for you, there are lots of banks offering attractive and free savings accounts, especially online. Make sure that the bank you choose is a member of the FDIC, so your deposits are insured by the government. And remember that while bank accounts are FDIC-protected, investments like stocks and bonds are not.

Visualizing How Money Can Grow Through the Power of Compounding

Let’s assume that you are 24 years old. You commit to saving $160 per month. After comparing banks online, you find a savings account that pays 1% APY (Annual Percentage Yield). That $160/month will grow to $97,341 by the time you’re 65—and about one-fifth will have been earned from interest. You can explore the growth of money at all ages, saving and interest rate scenarios.

Using the Power of Compounding to Become a Millionaire…

To become a millionaire by the time you retire, you need to start saving early.  The sooner you start, the better off you’ll be.  Bankrate.com has a great Personal Finance calculator that will answer the question, “How long until you’re a millionaire?”

Saving Tips

·         Commit to savings today!  Spend less than you earn and put the difference in a savings account.

·         Research your options.  There are different types of savings options.  They differ by degrees of risk and reward.  A standard savings account allows regularly scheduled deposits and permits withdrawals at any time. Interest rates are relatively low but there is no risk of losing your savings. This choice offers the most liquidity (easy access to cash) among all savings options. A certificate of deposit, or CD, may offer a higher rate of interest than a savings account. However, putting your money in a CD makes it inaccessible for the length of the deposit. In an emergency you can withdraw money from a CD, but you’ll pay a penalty and lose any interest payments. Like checking and savings accounts, CDs are usually FDIC-insured. To earn higher rates of return while taking on more risk, other assets like stocks, mutual funds and options can be considered.

·         A good savings account is intended to meet short term goals. These goals include, but are not limited to, covering emergency expenses, buying a car, and making other big purchases. It can also include helping others through charitable contributions.

·         Once you have achieved your targeted principal amount explore investing. Deposits placed in other types of investment vehicles will promise a higher rate of return but they do involve more risk than a savings account. Additionally, deposits are not usually insured against loss.

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7 unexpected retirement expenses

                                              7 unexpected retirement expenses

Your retirement could last 30 or even 40 years. Keep these potential costs in mind before you blow your entire nest egg.

Preparing for retirement is talked about so often before retirement and so little after it that you would think the last day of the daily grind is the endgame. In reality, day one of retirement is just the beginning of another adventure.

You've worked hard all your life, and now it's time to kick back, relax and enjoy the fruits of your labor. But retirement can last for 20, 30 or even 40 years. Before you live it up early in retirement, make sure you thoroughly understand the implications of and plan for these events that can sting your retirement nest egg years down the road:

Extended long-term care could be needed. For most people, long-term care costs hit suddenly and unexpectedly. Some people end up needing temporary aid, while others will need care for a prolonged period of time.

Your parents may require assistance. Advances in medicine are allowing many people to live a longer life, which is wonderful because you might be able to spend more quality time with your parents. But unless they've taken great care with their finances, there may come a time when their nest egg is depleted. You can help them early by assisting with their financial plan, but you should also make a plan for other ways to support them.

Children may still need help. The economy is finally gathering steam, but many young people are still out of work. You may need (or simply want) to help out your children financially.

You may have unexpected travel plans. Not many people budget for one-time travel plans because they are difficult to foresee. But whether it's going to a grandchild's wedding or your best friend's 50-year wedding anniversary party, there are many occasions you won't want to miss.

Inflation will sap your purchasing power for decades after retirement.The effects of inflation can be felt long before you quit your day job. This phenomenon that reduces your purchasing power won't stop just because you handed in your resignation letter. In fact, accounting for inflation is even more important for retirees because you won’t be getting salary increases as you did while you were working. Make sure to account for inflation in your retirement budget by assuming that you will need to spend an increasingly higher amount each year.

Moving costs could be a big expense in retirement.You may decide to migrate to a warmer climate soon after retirement, or you could want to stay close to your children whenever they relocate. Further into retirement, you may want to downsize for medical reasons or to spend less time maintaining a big home. Moving could work out great as long as you can afford the relocation costs.

There could be changes in the tax code or entitlement programs. It's almost impossible to predict what will happen to taxes and entitlement programs down the line. The important point to remember is that nothing is certain, so spread your risks by diversifying among pre-tax and post-tax retirement accounts, and don’t rely too much on entitlement programs. You just never know.

Retirement is often a long journey, and you are likely to encounter many unforeseen costs. Make sure there is room in your retirement budget for a few surprises.

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Long Term Saving Plans

       Must-Have Long-Term Savings

When it comes to having a successful financial plan, there's no question that you need to address specific must-have long-term savings goals. Without these goals, you will likely have a hard time saving  any money, as you will be inclined to simply spend every dollar that comes your way. Additionally, having a specific set of must-have long-term savings goals can provide some purpose and fulfillment to your savings efforts. These must-have long-term savings goals are reflective of a $75,000/year salary.

While it may seem like some of these financial ventures are much too far in the future to worry about right now, if you want to reach your financial goals, you have to realize that must-have long-term savings are the only way to get there.  

House down payment

How much: $20,000
When to start:  5 years before

Owning your own home is one of the most important financial decisions you can make for yourself and your family. Real estate can certainly be an investment, but you should not view it as a quick-flip opportunity. Over the course of several decades, real estate prices tend to appreciate, but they are not immune to short-term price fluctuations. Buying a home can be a very emotional decision, but you should not let feelings interfere with the business aspect of your decision. First, estimate what an affordable monthly payment would be based on your income, then find a house within that price range -- not above, no matter how much you adore the house itself. Then, aim to save at least 20% of the purchase price for a down payment. It is a lofty savings goal, but it will help your personal finances enormously as it will help you avoid the PMI, obtain a more favorable interest rate from the bank, and it may even help you negotiate the price of the house. Sellers are more interested to work with prospective buyers who are serious and have the real means to make a purchase -- which means a 20% down payment. Talk with your employer about depositing a portion of your pay check directly into a high-yield savings account to get your must-have long-term savings in order for a house down payment.

The formula

·         Monthly payments (interest, principle, taxes, insurance): 28% of gross income

·         Total house purchase price: 2-2.5x total gross income

Retirement account

How much: $10,000 per year
When to start: Now

The importance of Individual Retirement Accounts (IRA) is frequently highlighted, and there's a great reason for it. The traditional IRA lets you deduct your contributions from your taxes. In an even bigger windfall, although lacking the upfront deduction, the Roth IRA lets you withdraw your funds tax-free come retirement time and you can even take out your contributions with no penalty. The annual contribution limits for your IRA have grown tremendously over the past couple of years and as of 2008, you could contribute up to $5,000 (up from $4,000 in 2007) if you're under the age of 50.

Regardless of your income, this must-have long-term savings goal is not an optional expense, and should come before many things, such as saving for your kid's education. Ask your employer to directly deposit $192 each pay period into your IRA (assume biweekly) and consider using your tax refund money if you need to get a quick bump. You can make your annual contribution as early as the first of the year and as late as April 15 of the following year. You can take advantage of these factors in one of two ways, the first of which is to fund as early as possible. It may put a short-term damper on your cash flow, but you can have that $5,000 working for you a whole year earlier than if you had waited until the last minute.

There are a few more must-have long-term savings you should know about Over 30 years, the extra year will really make a difference in terms of  return on investment. If you are ultra-strapped for cash and you get paid biweekly, split up the contributions into 33 allotments rather than 26. With April 15 being the deadline, you should have an additional six or seven pay checks. With this approach, you will be contributing $151 every two weeks versus $192. A 401(k) retirement account is also an attractive must-have long-term savings goal, especially if your employer will match your contributions.

The formula

·         Monthly payments of around $800 per month

Education savings

How much: $200,000
When to start: Now (if you have kids or are expecting)

If you have kids or will have kids one day, you can be certain that paying for college will be a serious issue and realistically should not be an option considering that, on average, someone with a college degree makes about $800,000 more during their career than someone without a degree would. If you just had a baby, expect college to cost, at present, $15,000 per year, and up to over $59,000 per year in 17 years. Just like retirement, the sooner you can start this must-have long-term savings account, the better, as you will likely have less time to amass cash for college expenses. Consider a 529 plan, which grows tax-deferred and allows tax-free withdrawals for education expenses. A relatively aggressive mix of stocks should be used as, historically, stocks have outperformed bonds and savings accounts. Specifically, considering the average 7% per year increase in college costs the 3% savings account or the 4% CD is not going to cut it. If it comes down to a choice, you should fund your retirement account before you stash away cash for your kids' college expenses. While it is not ideal to have your loved ones saddled with debt after college life, student loans are always an option -- retirement loans do not exist.

Formula

·         College costs increase about double the inflation rate, 5% to 8% per year

·         FindAid.com has a great calculator

Emergency fund

How much: $500-$1,000
When to start: 0-3 months

We’re all smart enough to understand why it's important to have a cushion of cash in the bank. Unfortunately, it's easier said than done, especially when the experts are saying you need to have cash on hand to cover three to six months of living expenses, should the worst happen. That might as well be $1,000,000 in today’s world. Start simple and just commit to always having $500 to $1,000 on hand in a savings account linked to your checking account. This will be a savior when it comes to things like bouncing checks or dealing with more common emergencies like speeding tickets or insurance deductibles. Even in the event that the emergency exceeds $500, that must-have long-term savings stash will help you tremendously. Don’t wait on this just do it and make it your first priority. The feeling of being in control of your finances will do wonders for your financial confidence in the long run.

Formula

·         Put $500 aside now and work from there

·         being savings savvy

When you have a clearly defined goal on paper, you are that much more likely to be able to make it come to fruition. Start small, put it in writing and do simple math. You'll find it easier than you thought to save for your millionaire-like retirement and financial peace of mind.

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Sharing the wealth

Thinking about taking your first steps in the world of stocks and shares?

Getting a piece of the stock market action can be tempting for novice investors. Tales of other people's gains can make you wonder why you are squirreling cash away in a safe but not especially profitable savings account when you could be buying into funds that could help your money grow much faster.

But the first question to ask yourself before investing on the stock market is how you would feel if you initially lost money.

How would you react if your first statement showed that your investment was 20% down?  "Your first investment could be made just before the market goes up or before it goes down."

Another golden rule is to leave your investment alone for the medium term - at least three and preferably five or more years. A stock market investment needs time to develop, and huge gains in short periods are unlikely. "Time, not timing, is the friend of the investor," 

What to buy?
To spread risk, a fund could be the best way to begin. Although it is easy to buy shares in a single company, it is just as easy to buy an investment made up of the shares of 150 companies - a fund such as a unit trust or an open-ended investment company (Oeic).

"Using a fund avoids putting all your eggs in one basket," says Robin Stoakley, managing director for UK retail at Schroders investment managers.

You can also buy investment trusts and guaranteed equity bonds (GEBs). Investment trusts, like funds, are a collection of shares in companies but have a more complex structure than unit trusts or Oeics. GEBs are invested in a number of stocks, but run for a set period and usually promise to return the initial amount invested, plus a set amount of growth.

Whatever your first investment, don't forget to use your individual savings accounts (Isa) allowance. Holding an investment within an Isa wrapper entitles you to a certain amount of tax relief, including from capital gains tax (CGT). "If you invest your allowance of £7,000 it only has to double to become liable for CGT," points out Stoakley.

Spread betting
If you have a few thousand pounds to invest you could spread your money, says Fiona Sharp, senior financial adviser at M2Finance4Women. "You can split your money up and put it into low, medium and high risk funds," she explains.

"With fund supermarkets on the internet you can invest your £7,000 Isa allowance in seven different funds if you want to, although each will have an individual charge."

But choosing even three funds is a big task. There are income funds and growth funds, UK and overseas funds and those which combine all of these elements. "It's easy if you read about investing to jump on the latest bandwagon," says Sharp. "At the moment that is funds invested in Brazil, Russia, India and China, but that's a high risk area."

Equally dangerous is choosing a fund purely based on past performance. "If you look at the tables, the real performers of the last few years are the FTSE-250 funds," says Tim Cockerill, head of investment at financial advisers Rowan Associates. "Then it becomes more difficult because you need to understand what FTSE-250 companies are."

He recommends starting with a fund that invests in the UK. He also recommends a fund of funds for beginners. These spread risk even more by investing in a selection of other funds. Some of Cockerill's favourites include Credit Suisse Multi Manager UK Growth and New Star's Active and Balanced Portfolios.

Sharp also likes the Credit Suisse Multi Manager range and the T Bailey Cautious Managed fund.

Another option for a beginner is the tracker, which follows the movements of indices like the FTSE 100. The investor participates in the growth or losses of those companies.

However, a tracker fund is a passive investment because it simply follows the index. It isn't run by a manager actively looking for the stocks he or she believes will make the best gains.

Ask an expert
If you have a large sum to invest, a financial adviser should be able to narrow the vast choice down for you and choose a selection of funds that fit together.

However, if you are just starting out and making your own decisions there is a wealth of information on the internet that shows how funds have performed and what they invest in. Individual fund management house websites also provide much detail to help with the decision.

One more point to consider is how you put the money into the investments. Most funds allow you to make regular investments, drip feeding your money into the market, although this is not usually an option with guaranteed equity bonds.

The principal advantages of regular investments is that you can do so even if you don't have a lump sum, and putting money into the market over time means you don't buy when the price per unit may be high.

"Regular savings are also flexible in that you can stop and start them when you like and increase and decrease the amounts you save," 

The managers behind your chosen fund of funds will be able to let you know whether you can make regular contributions.

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Cash, Bonds or Equities: Where to invest your money and why

Cash, Bonds or Equities: Where to invest your money and why

There are three types of asset classes into which you can place your money: cash, bonds and equities. While it may be easy to differentiate one asset class from another, determining which asset class to invest in, and how much of your money to allocate towards each, can be a challenge. I have seen many investors’ portfolios constructed without the understanding of the reasons behind their choices. Not having the basic understanding of why you are placing your money in each asset class could be a contributing factor in why you are falling short of your financial goals. Hopefully this article will help you determine what percentage you invest in each asset class and why. CASH First, let us consider cash. This is where you would have your money in a savings/chequing account, Treasury bill, money market fund or a bond with less than one year left on its maturity. These all allow you to access your money virtually on a moments notice. The recommended purpose of holding cash is for emergencies, to cover off any temporary unemployment or to provide a financial bridge until your long term disability insurance begins to pay out. Financial planning manuals suggest having at least three months (after tax income) in cash. My recommendation is that it be anywhere from three months to two years depending on one’s age; the older a person is the longer the time frame. As for historical returns, cash has returned approximately 3%* which makes it a poor long-term investment. BONDS Next are bonds. This is where you loan your money to a government or corporation and the issuer guarantees the return on principle at a future date and pays you interest during the time it’s held. In my experience, investors have tended to primarily buy and hold bonds for the perceived safety they offer, for the emotional comfort that they get from being free from the ups and downs of the stock market, or for income. I don’t think that any of these are primary reasons to acquire bonds. Bonds, in my view, are best owned for the purpose of making available a specific sum of capital that you may anticipate wanting inside a five year time period, even though you can buy bonds for up to thirty years in duration. The idea is to time your bonds to mature when you will most likely need the money: when you are planning to buy a new car, a cottage or a home renovation. Historically, rates of returns on bonds have been approximately 5.5 %* which makes them a sub par asset class for long term investing, at best. EQUITIES The last asset class is equities. These are common shares of publicly traded companies that can be individually owned or professionally managed. I fully recognize that a home, cottage and other type of real estate fit this asset class, however, for the purpose of the article publicly traded companies will be the form of equities discussed. As an asset class equities have returned over 10%*, which makes it the superior asset class to invest in. WHAT NEXT? With this information, how do you determine what amount you place in each asset class? It really boils down to a process of elimination. You identify the amounts you wish to allocate to the first two categories and what is left over simply goes into equities. TWO THOUGHTS YOU MAY FIND You may find at least two thoughts come to mind when determining your allocation. The first is how bonds are recommended primarily for future sums of capital as opposed to income or safety. My guess is most of the investing public will think just the opposite and their portfolio may reflect so, meaning they will hold a certain percentage of bonds for income and/or comfort regardless of what rate of return they pay. Second, if this process is followed, the likelihood of an investor having the largest percentage of their portfolio in equities will be very high regardless of their age. First, because inflation and taxes erode the purchasing power of bonds over time, bonds by definition become, in my view, a poor financial investment. Yes I agree, they are popular and allow one to sleep better at night, at least on the short term. Yet it is a mistake to ignore bonds historical rates of return. Investors who have a very large percentage in bonds may wake up one day in their later years wondering why their money no longer has the same purchasing power it once did. As one of my industry colleagues adeptly put it, the only sane test of an asset class’s safety is to the extent to which it preserves or even enhances ones purchasing power. Bonds have so far failed in this area. It is important to note that while I am providing you a point of view that may challenge the conventional wisdom of owning bonds, please keep in mind there are investors that do have different approaches and objectives based on ones level of sophistication and net worth. In other words they may be perfectly fine owning bonds for reasons other than what is outlined in this article. Second, because we are living longer and having more active lives with each successive generation, we will require more money to preserve the lifestyle to which we have become accustomed. I know people who have being retired longer than they actually worked! I have found that as investors grow older they tend to invest more conservatively. By that I mean their risk tolerance for equities seems to decrease and their desire to inherently own more bonds in their portfolio increases. This occurs at precisely the time when, in my view, they need to hold a much higher percentage of equities in their portfolio than they are most likely emotionally comfortable. Again this approach may differ for a certain percentage of investors given their level of sophistication, net worth and objectives. ANSWER THIS QUESTION Answer this question: When it comes time to withdraw money from your overall portfolio, do you wish to attempt to recover 5.5%* a year during your retirement for say the next thirty years from an asset class that has had a historical return of 5.5%* or is it safer to attempt to receive 5.5% a year from an asset class that has had a historical return of over 10%*? With this awareness, choosing how much you allocate your portfolio to each respective asset class may determine whether your money and the income it derives for your retirement outlives you or you outlive it. Personally, I like the former outcome.

                     Need financial help? Here are some options

The ins and outs of hiring a financial adviser to manage your affairs or just give you some help. Let's face it: making financial decisions is hard. There's a lot you can figure out on your own, but we can all use help when it comes to something as important as how to save, invest and plan for the future.

Nevertheless, few households use a personal financial planner. Why not? Chalk it up to confusion and fear. After all, it can be daunting to entrust your financial future to a stranger. And it's tough knowing where to turn for help because a changing marketplace has blurred the line between the likes of insurance salesmen and your stockbroker. In fact, these days everyone - from law firms to tax planners, mutual fund families, and brokerages - is competing hard to manage your money.

What's more, because there are no state or federal regulations for the planning industry, anyone can call himself a financial planner. As a result, you'll want to hire a planner who's earned credentials, such as a Certified Financial Planner (CFP) or a Personal Financial Specialist (PFS).

The credentials are awarded only to those advisers who've demonstrated a certain degree of knowledge and experience - and who've passed exams covering major planning subjects. For example, to earn the CFP credential, a planner must pass an exam that tests knowledge of insurance, investment planning, tax planning, retirement planning, employee benefits, and estate planning and more.

Because qualified planners are trained to deal with myriad personal financial topics, they can help you set financial goals and priorities, then recommend specific steps to meet them. This means they may give advice on how you should allocate your investments, what kind of insurance you really need and explain how certain moves may affect your taxes or estate.

It's then up to you to decide if you want to follow that advice. A good planner will also recommend when you need more specialized help, say, working with a trusts and estates attorney who can help protect assets in a family businesses.

A roundup of the different types of help available:

GENERAL

Credential: CFP (Certified Financial Planner)

What they do: Roughly 59,000 CFPs nationwide provide financial planning and advice on topics from retirement planning, investments, tax and estate planning, employee benefits and insurance needs.

Requirements: Pass college-level courses in topics including retirement planning, estate planning, tax planning, investment analysis, and employee benefits. Then pass a two-day, 10-hour exam. Planners must also have a bachelor's degree and a minimum of three years of professional experience working with clients. A bachelor's degree is required for new applicants.

Credential: CPA/PFS (Certified Public Accountant/Personal Financial Specialist)

What they do: Provide overall financial planning with an emphasis on taxes and accounting.

Requirements: The PFS credential is given to CPAs who have a certain level of professional experience and are members of the American Institute of Certified Public Accountants.

A CPA must have practiced a minimum of 3,000 hours of financial planning over a five-year period prior to applying for the PFS exam, which covers risk management, retirement planning, investment planning, goal setting, tax planning, and estate planning.

The 4,100 CPAs nationwide who've earned the PFS title must reapply for the PFS credential every three years.

INVESTMENT PLANNING

Credential: IA or RIA (Investment Adviser or Registered Investment Adviser)

What they do: As the name suggests, an IA advises clients about securities. Note: A financial planner or broker may be an investment adviser but not all investment advisers are planners or brokers.

Requirements: Investment advisers who manage at least $25 million must register with the Securities and Exchange Commission.

IAs who manage less than $25 million have to register with their state securities agency. To find your agency, check the Investment Adviser Resgistration Depository or ask to see your adviser's "Form ADV." This is the registration form that he or she must file with the SEC or his state. This two-part form lists complaints, disciplinary actions, the adviser's education, employment history, fees, and investment strategies.

Title: Broker

What they do: Brokers are paid to trade securities on behalf of customers. Note: This is different than giving investment advice, though some brokers may also be registered investment advisers. Some firms may call a broker different titles such as an "account executives" or a "registered representative," and some brokers may specialize in one type of investment.

Requirements: Before they can buy or sell securities for clients, brokers must pass exams on trading procedures by the Financial Industry Regulatory Authority (FINRA), such as the Series 7 in general securities or Series 6 in variable annuities and mutual funds. Brokers must register with FINRA, so before you do business with one, check his or her background on FINRAs Broker Check.

Credential: CFA (Chartered Financial Analyst)

What they do: CFAs are generally portfolio managers and analysts for institutional clients, such as banks or mutual funds. But some of the 90,000 global CFA members advise wealthy individuals or families who have sophisticated investment needs.

Requirements: Candidates are recommended to spend 250 hours studying for three exams covering financial accounting, debt, equity analysis, and portfolio management. They must also have at least four years of professional experience in investments. To keep a CFA status current, a CFA must re-sign an ethics pledge each year.

Credential: CIMA (Certified Investment Management Analyst)

What they do: Advise high-net worth private clients on investments, although a few CIMCs advise institutional clients such as pension funds or trusts.

Requirements: Analysts have passed two, two-hour exams on topics like risk management, performance measurement, development of investor policy statement, and asset allocation. They must also have three years of professional experience as financial advisers.

Next, CIMA candidates must complete a six-month self-study educational component, in which the candidate can read or take courses in order to pass a Level I online qualification exam. The Level II material and exam are a one-week class held at The Wharton School, University of Pennsylvania or the Haas School of Business, University of California, Berkeley. CIMAs must also adhere to a Code of Professional Responsibility and maintain 40 hours of continuing education every two years.

Credential: CFS (Certified Fund Specialist)

What they do: Planners advise clients on mutual funds, and may buy and sell funds for clients. Some CFS holders provide general financial planning services for clients as well.

Requirements: Candidates must pass three multiple-choice exams covering the use of mutual funds as well as annuities and financial planning. They must sign a code of ethics before they can use the CFS credential. To keep the CFS status, a designee must take 30 hours of continuing education once every two years.

TAX PLANNING

License: CPA (Certified Public Accountant)

What they do: Those CPAs who specialize in taxes can help clients with tax planning and preparation. (Some CPAs may not deal with tax planning but instead focus on audits or accounting.) Unlike some other tax advisers, CPAs are authorized to represent clients before the IRS.

Requirements: Candidates must pass the rigorous Uniform CPA Examination. A CPA also must be licensed by the board of accountancy in the state where he or she works.

License: EA (Enrolled Agent)

What they do: Enrolled Agents are licensed by the IRS to represent clients before the agency during audits, hearings, or collection procedures. An EA may also provide tax-planning advice and tax-preparation services.

Requirements: Candidates must take a computer-based exam on major points of tax law, including income-, corporate-, estate-, and gift-taxes. Former IRS employees may qualify for an EA license without taking the test if they have worked five years at the agency in a position requiring relevant tax experience. All EA candidates must pass a background check by the IRS.